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ICRA Reaffirms `AAA` & `A1` Ratings on Oil India

  • Credit rating agency, ICRA rating of AAA has been reaffirmed for the Rs 2 billion, long-term, fund-based limits and the Rs 50 billion, long-term debt programme of Oil India (Q,N,C,F)* (OIL). The rating of A1 has also been reaffirmed for the Rs 15.02 billion, short-term, non-fund based limits and the Rs 50 billion, short-term debt programme of OIL. The outlook on the long-term rating is `stable.The reaffirmation of ratings takes into account the strong operating performance of OIL, as reflected in its competitive cost structure and favourable reserve replacement track record; its currently favourable financial risk profile, as characterised by robust profitability, low gearing and large liquid investments; its strategic importance to the energy security of India and the significant sovereign ownership.
  • ICRA takes note of the improvement in the profitability during 2010-11 owing to increase in prices of APM gas. The ratings, however, factor in the major expansion plans of OIL, including overseas expansion strategy, which could entail significant geological, geo-political and event risks.The risks are heightened by the relatively small size of the current operations of OIL and the limited diversification in its existing production activities, which are largely concentrated in the country`s North-East basins.ICRA, nevertheless, draws comfort from OIL`s stated policy of tying up with other state-owned companies like Indian Oil Corporation (IOC) for its expansion overseas; its primary focus on producing properties and the three-tier approval process of the Government of India (GoI).
  • ICRA expects the financial risk to remain low considering its current very low gearing levels; large liquid investments and robust internal accruals. However, the scale of the investment plans of OIL and the funding strategy adopted for the same are expected to have a critical bearing on its business and financial risk profile in the future. ICRA also notes that the profitability of OIL is vulnerable to any adverse change in subsidy sharing mechanism.Shares of the company declined Rs 36.35, or 3.07%, to settle at Rs 1,149.25. The total volume of shares traded was 4,938 at the BSE (Monday).

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